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“Why is crypto down today?” is a question that you might find yourself asking from time to time. A helpful starting point is to recognise that crypto is primarily considered to be a risk asset. This means it can rise and fall in tandem with other assets that are sensitive to investor confidence and available liquidity, such as growth stocks.
What are risk assets?
In market terminology, risk assets are investments that typically perform best when growth prospects appear strong and money is readily available. Think technology stocks, emerging market equities, and crypto like Bitcoin and Ethereum.
When investors become more cautious amid economic uncertainty, they tend to dial back risk across multiple markets at once. Even though crypto has its own internal catalysts, such as leverage and liquidation dynamics, its prices are still influenced by many of the same global forces that shape equities, bonds, and currencies. This broad, simultaneous de-risking is often referred to as a risk-off move.
A simple way to think about it:
- Risk-on: Investors are comfortable taking risk → capital flows into higher-volatility assets → prices rise.
- Risk-off: Investors want safety or cash → capital moves away from higher-risk assets → prices fall.
This doesn’t mean crypto and stocks always move in the same direction, but during periods of stress, correlations often rise because the same investors and funds are de-risking simultaneously.
What is global liquidity?
A key driver behind risk-on or risk-off behaviour is global liquidity, and is usually driven by:
- Interest rates: Higher rates increase the return on cash and safer bonds, which can reduce demand for risk assets.
- Central bank policy: When central banks make borrowing easier or inject money into the system, liquidity rises. When they tighten policy, liquidity falls.
- Credit conditions: If banks and lenders pull back credit, speculative activity across markets usually cools.
- Currency strength (especially the USD): A stronger USD can absorb global liquidity, making it more difficult for capital to flow into riskier global assets.
Liquidity doesn’t decide prices on its own, but it changes the environment in which investors take risks. When liquidity is abundant, markets can absorb bad news more easily. When liquidity is tight, even small shocks can lead to significant and disproportionate moves.
Why is crypto more volatile?
Less liquidity
Compared to global equity markets or bond markets, cryptocurrency is still relatively small. That means the order books can be less deep during volatile periods. When selling increases, prices may fluctuate rapidly through various levels.
Market sentiment and reflexivity
Crypto markets react strongly to both positive and negative sentiments. When prices fall, headlines and social media attention often amplify fear, uncertainty and doubt (FUD), creating additional selling pressure.
Accelerated market responses
When macro news breaks outside US or European trading hours, crypto can be the first “live” market to react. That can make crypto appear to be the main driver when, in fact, it’s actually the fastest responder.
Other common macro triggers
Market movements typically have multiple contributing factors. Please note that these are contextual explanations, not point-in-time claims about any specific day.
Economic uncertainty
When investors worry about slower growth, they may reduce exposure to volatile assets.
Inflation surprises
Inflation data can shift expectations about future interest rates. If markets expect rates to remain higher for longer, liquidity conditions are viewed as tighter, which can pressure risk assets.
Central bank messaging
Even without a rate change, the tone of central bank speeches or meeting notes can quickly shift sentiment.
Geopolitical shocks
Major geopolitical or systemic risk events can trigger a sudden move into cash or safer assets.
Correlation isn’t constant
Crypto markets are complex and multi-factor. Prices may fluctuate for reasons that are macroeconomic, cryptocurrency-specific, or a combination of both. Understanding global liquidity and risk sentiment provides a critical lens for interpreting short-term drawdowns without assuming a single cause.
Disclaimer: The information provided herein does not constitute financial, investment, or trading advice. Independent Reserve makes no representations or warranties regarding the accuracy, reliability, or completeness of this information. Readers should conduct their own research or consult a professional advisor before making any financial decisions. Cryptocurrency trading is a high-risk activity that may not be suitable for all investors. All Digital Payment Token services offered by Independent Reserve SG Pte. Ltd. are subject to the Risk Disclaimers as required by the Monetary Authority of Singapore, detailed under clause 3.1 of our Terms of use.
